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Article

WILL FALLING HOUSE PRICES MAKE CENTRAL BANKS MORE DOVISH?

By Raffaele Prencipe,
Fixed Income Portfolio Manager DPAM

wit-pijl

What is the impact on your disposable income from higher interest rates?

Not much, if you have little to no debt.

When central banks raise their policy rates, consumers’ spending power isn’t impaired automatically. It is the cost of servicing new debt for governments, companies and consumers that increases. The length at which interest rates on their current debt are fixed matters.

Governments may afford smaller budget deficits. Companies may only finance investments with returns high enough.

Consumers may spend less. The impact for households is limited where almost all mortgages are fixed for the long term, as for example in the US. The impact of higher rates is much bigger in countries where:

  • household indebtedness is high e.g. in the Nordics
  • mortgages have floating rates, as in Australia, or rates fixed only for a couple of years, as in the UK and New Zealand
  • the ratio of interest over disposable income is high (due to high current valuations of real estate).

 

There are other important differences across countries. Where mobility is high, the selling prices of houses have a bigger impact on their owners’ wealth.

When inflation will be lower, falls in house prices may make some central banks more dovish. The interesting thing is that the reaction function of central banks around the world will be different. Some may continue hiking while others start cutting. New Zealand even has house price stability in their mandate (though it was intended to limit exorbitant price increases).

What could be the consequences? Potentially, higher inflation in the long term as central banks may move away from restrictive territory before reaching their inflation target.

Figure 1: House prices since 2008

Source: DPAM 03.2023

Figure 2: House prices since 2022

Source: DPAM 03.2023

DISCLAIMER

Degroof Petercam Asset Management SA/NV l rue Guimard 18, 1040 Brussels, Belgium l RPM/RPR Brussels l TVA BE 0886 223 276 l

© Degroof Petercam Asset Management SA/NV, 2022, all rights reserved. This document may not be distributed to retail investors and its use is exclusively restricted to professional investors. This document may not be reproduced, duplicated, disseminated, stored in an automated data file, disclosed, in whole or in part or distributed to other persons, in any form or by any means whatsoever, without the prior written consent of Degroof Petercam Asset Management (“DPAM”). Having access to this document does not transfer the proprietary rights whatsoever nor does it transfer title and ownership rights. The information in this document, the rights therein and legal protections with respect thereto remain exclusively with DPAM.

DPAM is the author of the present document. Although this document and its content were prepared with due care and are based on sources and/or third party data providers which DPAM deems reliable, they are provided ‘as is’ without any warranty of any kind, either express or implied. Neither DPAM nor it sources and third party data providers guarantee the correctness, the completeness, reliability, timeliness, availability, merchantability, or fitness for a particular purpose.

The provided information herein must be considered as having a general nature and does not, under any circumstances, intend to be tailored to your personal situation. Its content does not represent investment advice, nor does it constitute an offer, solicitation, recommendation or invitation to buy, sell, subscribe to or execute any other transaction with financial instruments including but not limited to shares, bonds and units in collective investment undertakings. This document is not aimed to investors from a jurisdiction where such an offer, solicitation, recommendation or invitation would be illegal.

Neither does this document constitute independent or objective investment research or financial analysis or other form of general recommendation on transaction in financial instruments as referred to under Article 2, 2°, 5 of the law of 25 October 2016 relating to the access to the provision of investment services and the status and supervision of portfolio management companies and investment advisors. The information herein should thus not be considered as independent or objective investment research.

Investing incurs risks. Past performances do not guarantee future results. All opinions and financial estimates in this document are a reflection of the situation at issuance and are subject to amendments without notice. Changed market circumstance may render the opinions and statements in this document incorrect.

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